Exit Spirals in Coupled Networked Markets

Abstract

When are Coupled Networked Markets Prone to Sudden Collapse? Many important financial instruments are traded in large networked markets, whose fragility played a role in the Great Financial Crisis. In “Exit Spirals in Coupled Networked Markets,” Aymanns, Georg, and Golub study strategic market participation to show that fragility is exacerbated when several networked markets are coupled, so that activity in one market facilitates participation in others. Such coupling occurs, for example, when participants use relationships in one market to borrow funds to trade in others. The authors ask when market participation is prone to sudden collapse in an exit spiral. They explain when such exit spirals emerge and find that market coupling is a pervasive cause of fragility, creating exit spirals even between networks that are individually robust. The fragility of coupled markets can be mitigated if one of two coupled markets becomes centralized or if links become more correlated across markets.